Sub-prime shadow still lurks but analysts expect Fed to cushion impact
Wall Street's resurgent fears over its sub-prime crisis and the likely impact on the US economy and corporate earnings reverberated around Asian stock markets yesterday, bringing the sellers out en masse.Led by a 1,091-point or 3.7 per cent plunge in Hong Kong's Hang Seng Index, all major indices closed sharply lower, with the local Straits Times Index suffering a 105.34 or 2.8 per cent drop to a four-week low of 3,642.64.
All sectors were hit, led by the banks, SingTel and property stocks. The Singapore Exchange's shares, which had been largely instrumental in propelling the index to fresh all-time highs earlier this month, collapsed 70 cents or 4.7 per cent to $14.20.
Elsewhere in region, trading screens were also awash in red - the Philippine Composite closed 4 per cent down, the Jakarta Composite lost 4.3 per cent and Japan's Nikkei was 2.3 per cent weaker.
US stocks last Friday closed sharply lower following below-par earnings reports and/or lowered forecasts released by big names such as Caterpillar and 3M that cast doubt on the strength of the economy. Analysts also said the market has likely underestimated the impact of the sub-prime mortgage crisis on growth and earnings. During Asian trading hours the December futures contract on the Dow Jones Industrial Average traded at an 80-point loss, suggesting the US market would open Monday trading sharply weaker.
Most analysts, however, do not expect a repeat of Oct 19, 1987 when stocks crashed by 22 per cent in one day.
In US newspaper Barron's Oct 15 issue, US strategists gave several reasons for this, among them that the US Federal Reserve has repeatedly signalled a willingness to cut interest rates at the first sign of trouble, there is plenty of liquidity support and, unlike 20 years ago, China and India have emerged as world economic powerhouses.
However, analysts have pointed to a few potential sources of trouble that could continue to destabilise markets - record high oil prices, a collapsing US dollar and an overheating China stock market.
On the subject of oil prices, research outfit Ideaglobal said it does not expect this to inhibit the US Federal Reserve from cutting interest rates. 'We are expecting the Fed to cut by another 25 basis points on Oct 31,' said Ideaglobal. It expects the European Central Bank to keep rates on hold, 'before possibly cutting in the middle of next year'.
On the subject of US earnings, Reuters news agency yesterday said S&P 500 companies' third quarter growth number fell to 1.8 per cent on weaker-than-expected earnings reports.
'The pre-announcement activity for all publicly-traded US companies remains negative for Oct 2007 month-to-date. These companies have reported 144 positive forward-looking guidance statements and 226 negative outlooks,' said Reuters.
Yesterday, the Dow was down 45.11 points, at 13,476.91 in late morning trade. The Standard & Poor's 500 Index was down 2.85 points, at 1,497.78. The Nasdaq Composite Index was up 10.80 points, at 2,735.96.
Since reaching an all-time closing high of 3,875 on Oct 11, the ST Index has now fallen 233 points or 6 per cent in less than two weeks. Of this 167 points have come over the past two trading sessions. The Hang Seng, in the meantime, has lost 1,167 points or 4 per cent from its own record of 29,540.
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